Solubles Dominate Russian Coffee Market

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By Eugene Gerden

Russia’s leading coffee roasters plan a significant increase in their production capacities this year, thanks to the ongoing improvement of the Russian national economy and rising domestic demand for coffee.

Moscow Coffee House, Russia’s oldest roaster is considering a massive expansion of its roasted coffee output during the next several years, according to the company’s recent statements. c.e.o. Alexei Kemenov says the company will double its production beginning in 2020 after the completion of the reconstruction of the brand’s coffee factory in Moscow. According to its own data, Moscow Coffee House currently holds an 8% share of the Russian coffee market by volume.

Planned expansion will boost economy

Kemenov added that the planned expansion will help create new jobs at the factory and increase exports of Russian coffee abroad. Investment in the project is estimated at $60 million. The majority of raw materials needed for the new factory will be supplied from the company’s own plantations in Colombia and the Dominican Republic.

The establishment of a second large-scale factory will help Moscow Coffee House reach the EU coffee market, in particular. In addition to its traditional coffee brands, the company is pinning hopes on its freeze-dried chicory drink.

Currently, Moscow Coffee House operates a full-cycle coffee factory (that manufactures packaging, as well as sources most of raw materials locally) in the city of Tuchkovo, one of Russia’s largest producers of instant coffee and the first coffee company in the post-Soviet space and Eastern Europe. Total annual production capacity is estimated at one billion cups of coffee per year.

Solubles own the market

Instant coffees account for more than 80% of sales, which correlates with the overall statistics for the market, according to which 80% of Russians prefer instant coffee over other formats.

Despite the financial crisis in Russia, the Russian coffee market is steadily growing. According to data form the Russian Ministry of Agriculture, 2018 saw 150,000 metric tons in volume for all coffee types, which is similar to the 2017 figures. According to analysts’ predictions from the Russian Ministry of Industry and Trade, 2019 could see as much as 13% growth. In value, the market is estimated at 180 billion rubles (US$3 billion).

Currently, there are more than 400 coffee processing plants in Russia, the vast majority of which are small roasters. The number of large enterprises is estimated at 15.

Consumption is growing

The increase in production capacity will be also driven by the predicted growth of coffee consumption in Russia, estimated to grow 2-4% annually until 2021.

According to representatives of Rusteacoffee, the Russian association that unites leading Russian tea and coffee producers, the volume of coffee consumption in Russia has increased significantly since 2014, the biggest growth observed in roasted coffee. (Up to 70% of the market accounts for locally roasted coffee.)

Coffee consumption in Russia grew from $750 million in 2001 to $2.5 billion in 2016. Per capita consumption is 1.7kg of which 85% is soluble, accounting for 48.5% of coffee sales.   Several specialty coffee chains and a growing number of independents span the vast Eurasian steppes.

Ongoing growth in the market is due, in part, to state support, which has been allocated for the needs of the Russian coffee industry by the national government in recent years — and when domestic production increases, imports decline.

The Russian government plans to continue its support of domestic coffee manufacturers during the next several years, primarily through the provision of taxes, customs, and other benefits. Russian Minister of Industry and Trade Denis Manturov, a state official responsible for the development of Russia’s coffee industry, says duties on the imports of raw materials for the needs of the Russian coffee industry may be lifted at the beginning of 2020. In addition, the government is considering introducing a 7.5% customs duty on coffee imports.

Russia, which annually imports $497 million worth of tea, landed $593 million worth of coffee in 2018, ranking 13th among the world’s coffee importers by value. Coffee imports are considerably less than tea by volume but account for 52.9% of hot beverage sales.

Italy currently remains the leading exporter of coffee to Russia, with an estimated share of 44% of Russia’s annual coffee imports. Russia remains the European Union’s most important trading partner for soluble coffee. But in recent years the market share of soluble has fallen against 6% growth in ground roast [see chart]. The Commonwealth of Independent States (CIS) report similar growth rates.

Potential threats to the Russian coffee industry

In the meantime, Russian coffee manufacturers may face serious threats to doing business in the domestic market because of the potential forthcoming free trade zone between Russia and Vietnam currently being discussed by the governments of both countries.

Vietnam is one of the world’s largest coffee exporters, and the establishment of a free trade zone would result in an excess of cheap Vietnamese coffee coming into Russia. This could cause many local small and medium-sized manufacturers to lose revenue.

To date, manufacturers have already called on the Russian government to take measures to prevent uncontrolled supplies of coffee from Vietnam to Russia.

According to the Rusteacoffee, the planned lifting of duties will have a negative impact on the domestic coffee industry, while any reductions of the existing duties will prevent implementation of new investment projects in the industry and lead to massive job loss.

In addition, manufacturers say this will result in the reduction of the quality and safety of coffee manufactured in Russia, and this will make the local market more vulnerable globally.